Expert Predicts Margins Going To Get Tighter
Tight margins are only going to get tighter, according to one person, who shared some strategic tips on how to respond to that environment in remarks before the Texas league annual meeting here.
Jared Cahill, national director of alliances for John M. Floyd & Associates, Inc., Baytown, Texas, observed that "As interest rates rise, the vise on credit union bottom lines will squeeze ever more tightly, requiring some of them to reshape their asset/liability portfolios, boost non-interest revenue and invest in developing a sales and service culture that better markets and cross-sells products and services to their members and potential members."
Prior to his work at JMFA, Cahill has worked for the Credit Union Association of New Mexico, chartered and managed Saguache County CU in Crestone, Colo., and was VP-commercial lending for MBank in Dallas. He told credit unions that "one of the specific challenges in the past six or seven years has been the ability of spread income to generate a positive bottom line. "In other words, credit unions have experienced an increasing reliance on fee income to break even. From 1990 to 1997, return on assets (ROA) less non-interest income ranged from about 0.2% to 0.%. However, since 1998, ROA less non-interest income has been very close to zero and has actually been near -0.2% in both 2003 and 2004.
"Based on the economic outlook and rate trends for the past two economic expansions, credit unions may be looking at an average reduction in their 2005 ROA of 46 basis points or 0.46%," Cahill stated.
Credit unions must "increase non-interest income, lower operating costs, grow and be competitive," he emphasized. Surprisingly, he said, only about 69% of CEOs in one survey rank "increasing fee income" as "critical" or "very important."
Cahill advised a concerted effort to increase non-interest income by enhancing fee income, such as an overdraft privilege program, and product income, such as Credit Disability Insurance and Credit Life Insurance.
He added that credit unions, which have grown capacity at about 15% a year while growing only 8%, can lower operating costs by attracting more members and services to soak up over-capacity, he said.